Annual Report - CoBank

At December 31, 2011, the assets of the Insurance Fundaggregated $3.4 billion. However, due to the other authorizeduses of the Insurance Fund, there is no assurance that anyavailable amount in the Insurance Fund will be sufficient tofund the timely payment of principal or interest onSystemwide Debt Securities in the event of a default by anySystem bank having primary liability thereon.Early Extinguishments of DebtDuring 2011, 2010 and 2009, we recorded losses of$50.4 million, $26.5 million and $18.2 million, respectively,on the early extinguishments of $649.3 million, $235.7 millionand $231.2 million, respectively, of Systemwide DebtSecurities. These early extinguishments of debt resulted fromour general practice of extinguishing higher cost, similarlytenored debt to offset the impact of prepayments in both ourloan and investment portfolios and to maintain a desired mixof interest-earning assets and interest-bearing liabilities. Alllosses on early extinguishments of debt are reported as acomponent of noninterest income.Note 6 – Subordinated DebtAt December 31, 2011, we had $1.0 billion ofsubordinated debt outstanding, which is composed of two$500 million issuances – one in April 2008 and the other inJune 2007. The net proceeds of these issuances($993.5 million) were used to increase our regulatorypermanent capital and total surplus, pursuant to FCAregulations, and for general corporate purposes. Thesubordinated debt is unsecured and subordinate to all othercategories of creditors, including general creditors, and seniorto all classes of shareholders.The $500 million of unsecured subordinated notes issuedin April 2008 are due in 2018 and bear interest at a fixed rateof 7.875 percent, payable semi-annually in cash on the 15thday of April and October each year. Our $500 million ofunsecured subordinated notes issued in June 2007 are due in2022 and bear interest at an annual rate equal to three-monthUSD LIBOR, reset quarterly, plus 0.60 percent, payablequarterly in cash on the 15th day of March, June, Septemberand December each year. For both issuances, interest will bedeferred if, as of the fifth business day prior to an interestpayment date, any applicable minimum regulatory capitalratios are not satisfied. A deferral period may not last for morethan the shorter of five consecutive years or the maturity dateof the subordinated debt. Among certain other restrictions, wemay not declare or pay any dividends or patronagedistributions until interest payments are resumed and alldeferred interest has been paid.The 2007 issuance of subordinated debt may beredeemed, in whole or in part, at our option, on June 15, 2017,and each of the 2007 and 2008 issuances of subordinated debtmay be redeemed, in whole, at our option at any time upon theoccurrence of certain defined regulatory conditions. Anyredemption of subordinated debt shall be at a redemption priceof 100 percent of the principal amount, plus any accrued butunpaid interest to the date of redemption, provided we havemade payment in full of all amounts then due in respect of oursenior indebtedness.Our subordinated debt is not considered System debt andis not an obligation of, or guaranteed by, the Farm CreditSystem or any banks in the System, other than CoBank.Payments on our subordinated debt are not insured by theInsurance Corporation.Note 7 – Shareholders’ EquityPatronageAs a customer-owned bank, we return a portion of ourearnings to shareholders in the form of qualified patronagedistributions. Eligible shareholders will receive patronage for2011 amounting to $340.7 million, of which $230.8 millionwill be paid in cash in 2012 and the balance will be paid incommon stock. For 2010 and 2009, total patronage was$284.6 million and $268.9 million, respectively, of which$194.1 million and $183.8 million, respectively, was paid incash in the subsequent year. All patronage distributionsrequire the approval of our Board of Directors.Capitalization RequirementsIn accordance with the Farm Credit Act, eligibleborrowers are required to purchase equity in CoBank as acondition of borrowing. The minimum initial borrowerinvestment is equal to the lesser of one thousand dollars or2 percent of the amount of the loan. The minimum initialinvestment is generally received in cash at the time theborrower receives the loan proceeds.Association customers are required to invest in ourcommon stock, as discussed in Note 17.Most agricultural export finance customers, customers ofFCL and certain other borrowers are not required to purchase,nor do they own, equity in CoBank. Likewise, they do notparticipate in patronage distributions.Retirements of common stock, if any, are determinedannually after the Board of Directors sets the target equitylevel. Net cash retirements are made at the sole discretion ofthe Board of Directors and are at book value not to exceed paror face value.CoBank 2011 Annual Report84